Economic Data Fixed Income Date

Macro Demon 2.0: Rise and fall of 22 May 2023

2000 note

On May 19, the RBI declared to remove Rs 2,000 notes from circulation after a review. The RBI stated in a release
that the Rs 2,000 banknotes will still be accepted as legal tender. According to an examination of the most recent
statistics from the RBI, was the Rs. 500 note, which represented 73.3 percent of the overall circulation and was
valued Rs. 22.77 lakh crore in value terms and Rs 2,000 bank notes, which made up 13.8 percent of the overall
circulation.

According to the RBI's most recent report, which was published on May 19, just 10.8% of the banknotes in
circulation on March 31, 2023, had a value of Rs 2,000 or more.

Potential effects on the markets-

a) Given all of these variables, banking sector liquidity may increase over the upcoming two quarters by at
least Rs 2.8 trillion.
b) Rates should fall drastically as the amount of surplus liquidity in the banking sector might increase by up to
Rs. 3 trillion in the near future.
c) Bull steeping may happen: Favorably affect the shorter end of the curve.
d) Deposit rates may fall
e) CD issuances may slowdown
f) Dated securities up to 5 yr may perform better
g) Credit growth may further improve
h) Impact on the longer end of the curve. Long-end has already posted a decent rally. Term premium is less
lucrative, Issuance calendar (Supply) is tilted towards the long end - Markets aren't excited about the RBI
dividend amount - Liquidity increase may dash the hopes of OMO (OMO possibility may increase in Q4
FY24 due to possible currency leakage) - The banking system as a whole is having surplus SLR of more than
26% So there is less cheer for the long end of the curve. But that doesn't mean the long end won't benefit.
It will benefit from this move on an absolute basis but relatively a bit lesser. However, if recession fears
gathers the momentum, then the long end may perform better in terms of absolute gains.
i) Equities - Banking stocks could rally as banks would park deposits with RBI at the SDF rate of 6.25%. Rally in
treasuries would be positive for banks' investment portfolio. Overall liquidity glut and lower rates should be
positive for equities.

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